Ontario Federation of Labour faced with pension fund deficit

Canada’s largest provincial labour federation is facing a pension fund deficit, and accounting and solvency experts suggest the Ontario Federation of Labour may need to lay off workers or even trim employees’ benefits if the situation doesn’t improve.

The state of the books prompted an independent auditor to include a note at the bottom of a letter to OFL members this year.

It says financial conditions in fiscal 2012 (ended June 30) “indicate the existence of a material uncertainty that may cast significant doubt about the Federation’s ability to continue as a going concern.”

The OFL has run deficits for the past two years, and liabilities, led by pension obligations, far outstrip assets on the balance sheet.

While challenges posed by looming pension obligations are not unique to the OFL, the cure may be more difficult for the federation, which bills itself as an umbrella group for Ontario’s working people and their unions, experts suggest.

The shoe is on the other foot now — it’s on their foot

Organized labour was instrumental in securing retirement benefits for workers after the Second World War, sometimes at the expense of pay increases, notes Ian Markham, a senior actuary and retirement specialist at pension consultant Towers Watson in Toronto.

Until recently, he said, maintaining workers’ financial security throughout their lives was considered “absolutely sacrosanct to most unions” — to the point they resisted any changes to pension agreements and benefits, even at companies that were struggling financially as a result of their obligations.

“The shoe is on the other foot now — it’s on their foot,” Mr. Markham said.

The OFL has a staff of 16, plus three elected officers. Members are public and private sector unions, including the Canadian Union of Public Employees and the Canadian Autoworkers Union.

The federation organizes and co-ordinates events, consultations and presentations on common issues and policy concerns, such as equal pay, workers’ rights, and the utility of government austerity measures.

There may be tough decisions ahead for the OFL and other labour groups that may be in the same boat, says Mr. Markham.

If the pension promises are costing labour groups “a huge amount,” as they are for many private and public-sector organizations, “maybe they can’t have as many employees … they [too] may have to consider layoffs,” he said.

The OFL’s two pension plans — one for executives, the other for employees — “were not fully funded” when last valued by actuaries in mid-2010, according to financial statements for fiscal 2012 obtained by the National Post.

Nancy Hutchison, the OFL’s secretary-treasurer, said Monday the labour organization is hoping for “some relief” when the next actuarial valuation is completed later this year.

We don’t certainly want to turn our backs on any pension obligations

In the meantime, she said, the OFL is cutting day-to-day costs but remains committed to meeting or exceeding the funding requirements of its pensions with no cuts to benefits.

“We don’t certainly want to turn our backs on any pension obligations, as we find, sadly, [other] employers do,” she said. “We’re often fighting that in the labour movement.”

Linda Haslam-Stroud, president of the Ontario Nurses’ Association, said her union pushed hard for more financial accountability before withdrawing from the OFL in 2011.

She said she knew the OFL had problems with funding its pensions, but was surprised annual revenue did not cover expenditures.

When you have large liabilities, the last thing you do is spend more than you take in

“When you have large liabilities, the last thing you do is spend more than you take in,” she said.

Alan Mak, a chartered and forensic accountant at Rosen & Associates Ltd. in Toronto, says the auditor’s note attached to the OFL’s financial statements means the organization must take steps to remedy the situation, even if it is not done immediately.

The note essentially means the federation would be unable to meet all its obligations if required to do so on short notice, but this is not a likely scenario, he explained.

“The question is, when it comes time to catch up, where will the cash come from?” he said.

“They owe nearly three times more than they have … So their balance sheet looks awful, bottom line.”

There is more than one reason for the condition of the books, but the biggest cause is “significant” pension obligations the labour federation has to its own employees, Mr. Mak says.

“Just opening the doors every day they’re running a deficit — and they have for the past two years,” he said after looking at the fiscal 2011 and 2012 financial statements.

These show a “deficiency of revenue over expenditures from operations” of $180,000 in fiscal 2012. That means the OFL spent more than the $4.3-million it takes in each year — primarily through a per capita tax to represent the interests of 54 unions and more than one million workers.

But more troubling, say accounting and solvency experts interviewed by the Post, is that the deficiency balloons to $651,203 — about 15% of annual revenue — when obligations for pension, severance and post-retirement benefits are included.

The OFL’s “accumulated” net asset deficiency is nearly $6-million, according to the note from the independent auditor, BDO. That’s about 27% more than it took in for each of the past two years.

“They’re very under water” on their obligations to employees, which are expected to grow, said Mr. Mak. “It’s not something they can escape … The pension’s killing them.”

The weight of pension obligations is by no means unique to the labour federation. Many pension plans in Canada are only between 75% and 90% funded.

Companies such as Air Canada, and even the multibillion-dollar Ontario Teachers’ Pension Plan, have been forced to make changes to counter recent trends, such as longer lifespans, low interest rates, and choppy stock markets that are making it difficult to meet retirement promises made years ago to workers.

The financial statements seem to show the OFL has tried to cut expenses. For instance, the cost of conferences and seminars was chopped by about 75% last year, compared with fiscal 2011.

“We are currently on the path to balance the books,” president Sid Ryan said in a statement provided in response to questions about the finances. The OFL “is meeting all of its financial obligations and paying its bills,” he added.

Ms. Hutchison said the cost-cutting extends from large items to small, such as refraining from providing coffee at meetings.

Accounting and solvency experts interviewed by the Post, two of whom spoke on the condition that they would not be named, say some of the OFL’s expenses reflected in the 2012 financial statements remained higher than expected, including capital leases on equipment that carry in implicit interest rate of 9%.

Mr. Mak said the high rates raise questions that are not answered by the financial statements.

“We’re in an era of low interest rates, so it begs the question: What are these assets and are [the interest rates] inherently high?”

While poor credit history or perceived risk of repayments can result in a higher-interest lease, so can a locked-in lease negotiated years ago when rates were higher, the experts said, adding some organizations choose financing companies that will take on business traditional lenders like banks don’t want.

Ms. Hutchison said the leases on the books are for photocopying equipment, and the financing is done, as is common industry practice, through the firm that provides the machines.